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What is Your Debt Personality:

Secured Debt

Part 1

So you were directed to this section because you’re currently paying down a secured debt, most likely a mortgage or car loan – but what exactly is secured debt?  Well there are two types of loans/debt: secured and unsecured.  Unsecured debt is anything that does not have a direct, tangible form of collateral attached to it, like a non-specified personal loan or credit card debt.  Secured debt is that which DOES have some tangible form of collateral – in the case of a mortgage, this would be the house or property, and in the case of a car loan this would be the car itself.


Secured debt is given this name because the lender basically has guaranteed recourse if the borrower defaults on their loan.  Foreclosures are a common result of borrowers defaulting on their mortgages.  The lending bank seizes the property and then sells it off in order to recoup the majority of their financial loss.   


Borrowers with secured debt are also required to insure the “collateral” in case anything were to happen to the property or car.  This is why new homeowners are required to maintain an insurance policy for their new home and one of the reasons why auto insurance is mandatory for many car owners.  This way, if any damage occurs to the property the lenders will be reimbursed for the lost value.


Since mortgages and car loans are the most common types of secured debt, we’re going to focus on those in detail.  But many of these tips can be applied to a variety of loan types, so don’t go too far!  


Before You Jump In

We understand that you’re likely here because you already have some form of secured debt, but we also want to offer some guidance for those who either have not yet applied for a secured loan or who will be looking for another in the future.  


  1. Always shop around for the best rates.  Remember that inquiries related to larger loans like these will not significantly affect your credit score, so take advantage of this opportunity to shop around for the best deal.  It’s recommended that you collect information from several potential lenders before moving forward with a decision.  You’re often able to access basic loan information online, so you can do a preliminary search without even leaving the comfort of your home.  


  1. Don’t just look at interest, be sure to ask each potential lender about whether these rates are adjustable or fixed, any additional fees that may apply to you, and their down payment requirements.  Wait, while we’re at it, what’s the difference between an adjustable and a fixed rate loan?


Fixed – These are the more popular type of secured loan.  Lenders offer a set interest rate and payment plan based on the amount and length of the loan.  Your interest rates will not be subject to swings in the market.


Adjustable – Less common than fixed-rate loans, mostly because of their tendency to change with the financial market.  Interest rates will likely be lower than a fixed-rate loan at first, but may grow if the market changes for the worse.  Adjustable rate loans are a bit of a gamble, because you might be able to take advantage of lower rates but always run the risk of the market suddenly changing.


  1.   Once you’ve found a loan that works for you, make sure you get it in writing.  While you may find the perfect loan, the lender has every right to change the terms if you have no proof of what you previously agreed to.  Having a written record of existing offers will also be a powerful negotiating tool as you visit different lenders.


  1. Don’t be afraid to negotiate.  Let lenders know that you are shopping around for the best rates, and that you won’t hesitate to choose the loan that is ultimately best for your needs.  Don’t let niceties sway you into choosing a less-than-stellar loan, remember that you’ll be living with this financial decision for years to come, and a free cup of coffee won’t pay the bills during that time.  Also, don’t be afraid to walk away – a lender who is difficult to deal with before you even take an offer will not be any easier to deal with when it comes time to refinance.

How to Manage Your Mortgage

The most common type of mortgage is a fixed-rate, 30 year loan.  While this payment schedule is the easiest option for most middle-class homeowners to budget for right off the bat, the sheer length of this loan means that interest ends up being a huge chunk of your final balance.  While it’s not feasible for the vast majority of new homeowners to choose the 15 year payment plan offered by most lenders, you will likely have the opportunity to refinance – which basically means moving the current debt from one set of terms to another at a time when you are more financially successful – during the time you are paying off your mortgage.  

Even if you are unable to currently refinance, or simply choose not to, the best thing you can do for yourself and your mortgage is to pay it off as quickly as possible.  This could mean shaving off a couple months’ payments or several years, but you will save an astounding amount on interest just by doing this.  


There are several recommended strategies for edging yourself ahead on your mortgage without crippling yourself financially:

  • Round up your mortgage payments each month.  While it may not seem like much now, these couple dollars will add up over the course of a 15 or 30 year mortgage.
  • Even if you don’t actually refinance, you can calculate and make payments on your 30 year mortgage like it’s a 15 year one, and therefore pay it off twice as fast.
  • At each financial quarter (March 31st, June 30th, September 30th, and December 31st) budget for an extra house payment.  On a 30 year mortgage, this practice could shave 11 YEARS off of your payment plan and over $50,000 in interest.  We’re not joking.
  • Allocate bonuses or other financial windfalls solely to your mortgage (assuming you have no other outstanding debt that needs to take priority.)


How to Manage Your Car Loan

Many of the techniques for paying off a mortgage successfully apply to car loans as well, just on a smaller scale.  The industry standard for auto financing tends to be a fixed-rate 5 year loan, though these loans may offer more flexibility than a mortgage when negotiating terms.  Many popular car publications use this standard 5 year loan to determine the ultimate cost of a new vehicle, including estimated interest and maintenance costs during those 5 years.  


All of the mortgage tips above can be used for a car loan, but we have one more tip that might make financing your new car a little less painful:


  • Home equity is the value in your home that can be used for collateral.  You may have heard home equity loans referred to as “second mortgages” – although they’re similar, home equity loans are generally used for much smaller amounts than any mortgage.  Right now, home equity loan rates are trending lower than car loans, so if you have equity in your home available for you to use it might be a better decision financially to use this for a new car purchase.


While you may feel bogged down by secured debt, remember to think of it as an investment in your future.  Like any other large purchase, make sure you are shopping within your budget, opting for the best rates, and maximizing your down payment before committing to anything.  As long as you are realistic about your finances, you can have a stress-free experience with your new home or car, and enjoy it for years to come.



Secured Debt Checklist:


  • Always shop around for the best rates when applying for any type of secured loan.
  • Refinance your secured loans to better interest rates when possible.
  • Round up your payments or make additional payments in order to pay off your loan sooner.
  • Enjoy your new property!

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